Originally from Dispute Resolution Journal

Consumer class actions have flooded the courts for many years. The stakes are high for corporations named as defendants in these cases because even though the individual consumer’s claim is small, the class size is large and the fees sought by the attorneys for the plaintiff class are high. For this reason, most consumer class actions filed in court eventually settle. To protect themselves from the possibility of runaway jury awards, many consumer companies began to require their customers to arbitrate disputes. Then they began to ban the use of any kind of collective proceeding (i.e., a class action) in litigation, arbitration or administrative proceedings. One of the most important issues facing these companies is whether the consumer’s right to commence a class action in court can be waived simply by an agreement to arbitrate all disputes. Another is whether the waiver precludes classwide arbitration. There is case law addressing whether class action waivers are unenforceable under the state law principle of unconscionability. The cases also address whether state law principles of unconscionability can be applied without offending the Federal Arbitration Act (FAA).1 For arbitration practitioners, the question of FAA preemption is probably more compelling. This article examines this issue. Section 2 of the FAA makes an arbitration clause enforceable unless a state law contract defense, whether legal or equitable, would apply. It provides that an arbitration agreement “is valid, irrevocable, and enforceable, save upon such grounds as exist at law or in equity for the revocation of any contract.”